The Market Reaction to the Choice of Accounting Method for Stock Splits and Large Stock Dividends

by. Graeme Rankine; Earl K. Stice
The Journal of Financial and Quantitative Analysis, Vol.32, No.2. (Jun.,1997), pp.161-182.

Abstract
Prior research has used inaccurate classification rules to distinguish between stock splits and stock devidends. The CRSP classification of two-for-one stock distribution agrees with the actual accounting treatment impacts the announcement period reaction-two for one distributions accounted for as stock dividends are associated with five day announcement returns for distributions accounted for as stock splits. Announcement returns are positively related to earnings growth in the two years following the distribution for stock dividend firms but not for stock split firms, The accounting choise appears to be used to confirm management's private information about future earnings revealed at the time of the distribution announcement.